The Earned Income Tax Credit (EITC) is a special Federal income tax credit for low-income workers.The credit reduces the amount of tax they owe (if any) and is intended to offset some of the increases in living expenses and Social Security taxes. Eligible persons who owe no taxes, or whose tax liability is smaller than their tax credit, receive all or part of the EITC as a direct payment. Some workers are prepaid their credits through their employers as “negative withholding” from paychecks. EITC is administered by the Internal Revenue Service as part of its responsibility for collection of Federal income taxes. For tax returns filed through April 1995, 18.3 million of a total of 109.3 million returns (16.7%) claimed earned income tax credits totaling $24.8 billion.
The EITC was initially enacted as a temporary measure in the Tax Reduction Act of 1975 and made permanent in the Revenue Act of 1978.The intent was to aid the working poor—families with
children who had an income below the poverty level despite having working members.The 1975 Act emphasized two long- term objectives: (1) to offset the impact of payroll taxes on low- income workers; and (2) to encourage low-income persons, who might otherwise receive welfare benefits, to seek employment.
BenefitsThe earned income credit amount depends on the taxpayer’s
number of qualifying children, amount of earning, and modified adjusted gross income (AGI), which includes items such as taxable Social Security benefits and unemployment benefits.
The amount a person can earn in 1997 and still receive a credit must be less than:
• $25,760 with one qualifying child,
• $29,290 with more than one qualifying child, or • $9,770 without a qualifying child.
The maximum amount of the credit is:
• $2,210 with on qualifying child,
• $3,656 with more than one qualifying child, or • $332 without a qualifying child.
Income from working is considered earned income even if it is not taxable.This includes wages, salaries, and tips; union strike benefits; long-term disability benefits received prior to minimum retirement age; net earnings from self-employment; voluntary salary deferrals; voluntary salary reductions; and basic quarters and subsistence allowances from the U.S. military.
The EITC amounts are determined by multiplying income by a credit rate. For example, for 1997, the maximum credit an eligible taxpayer with two or more qualifying children can claim is $3,656, based on a credit percentage of 40% applied to an earned in- come threshold of $9,140.This maximum is payable for earned income (or AGI, if greater) up to a phaseout income of $11,930. Above this income, a phaseout percentage (21.06% for those with two or more children) is applied to the difference between the actual and phaseout income. The result of this calculation, sub- tracted from the maximum credit, yields the EITC amount.
The EITC amount can be affected by receipt of other types of public program benefits when they are counted in determining AGI and thus serve to reduce the benefit (for example, unemployment insurance benefits are included in AGI). Conversely, the credit has no effect on certain welfare benefits.The earned income credit cannot be used to determine eligibility or benefit amounts for AFDC, Medicaid, SSI, food stamps, and low-income housing .
EligibilityEITC eligiblity and credit amounts generally are determined
qualifying children who meet age, relationship, and residency tests or meet other requirements.
The child must be the tax filer’s son, daughter, adopted child, grandchild, stepchild, or eligible foster child (this could include a niece, nephew, brother, sister, or cousin).
The child must have lived with the tax filer for more than half the year (the whole year if the child is an eligible foster child). The home must be in one of the 50 States or District of Columbia. For pur- poses of the credit, U.S. military personnel stationed outside the United States on extended active duty are considered to live in the United States during that duty period.
The child must be under age 19 at the end of the year, be a full- time student under age 24 at the end of the year, or be permanently and totally disabled at any time during the tax year, regardless of age.
Persons without a qualifying child must be age 25 or older but less than age 65, and not be a dependent for whom a dependency exemption is allowable to another taxpayer.
Persons with investment income of more than $2,200 cannot claim the earned income credit. Investment income if taxable interest and dividends, tax-exempt interest, and capital gain net income.
For 1997, a Social Security number is required for each person listed on the tax return.
Earned income tax credit provisions for 1997
One child Two or morechildren No children
Earned income threshold $6,500 $9,140 $4,340
Credit percentage 34.0 40.0 7.65
Maximum credit 2,210 3,656 332
Phaseout income 11,930 11,930 5,430
Phaseout percentage 15.98 21.06 7.65
Expendituresnent of the expenditures—60% of the total—was accounted for by public education, which then, as now, came primarily from State and local funds. Federal expenditures were mostly for veterans’ benefits and staff retirement systems, and accounted for only 20% of the social welfare expenditures total. In 1993 (the latest year for which complete data are available), social welfare spend- ing reached 21.1% of the gross domestic product (GDP). Nearly half of the total was spent on social insurance programs. The following table presents a summary of social welfare expenditures under public programs for selected fiscal years beginning with 1970.
It was the Depression of the 1930’s that brought the Federal Government into the social welfare field. In 1933, the Federal Emergency Relief program began to take over the mounting cost of support for the unemployed, and in 1935 the Social Security Act established a national system of old-age insurance, a Federal- State system of unemployment insurance, and Federal programs of grants-in-aid to develop and strengthen the State public assis- tance and other programs.
The first year in which expenditures for public aid outstripped those for education was 1934, and the bulk of that aid came from the Federal Government. This pattern continued throughout the 1930’s and early 1940’s, but by fiscal year 1943, education was once more the largest spending category. In the post-World War II years veterans’ benefits became the largest category of expendi- tures, accounting for about one-third of the total through 1949. In the 1950’s, education resumed its primacy, although it was now closely followed by social insurance. The latter had begun to increase in importance in the 1940’s. At that time, the Federal- State system of unemployment insurance accounted for 45-60% of all social insurance spending.
It was in 1951 that the Old-Age and Survivors Insurance (OASI) program first became the leading component of the social insurance category. With the addition of Disability Insurance (DI) to OASI in 1956, that lead grew, and it has been increasing ever
since. The year 1965 brought the introduction of Health Insurance (HI) for the Aged (Medicare), and by 1967 social insurance had become indisputably the largest of the social welfare categories, a position it continues to hold. In the succeeding years, coverage under the OASDI and HI programs was expanded, most notably by the inclusion in 1972 of the disabled in the Medicare program. This expansion of the Medicare program, the aging of the insured population, and the rapidly rising cost of health care ensured the social insurance category’s continued growth. By the 1980’s, social insurance expenditures accounted for half of the social welfare total, and the OASDI and HI programs alone represented a larger share of Federal spending than any category except defense. This remained true in 1993.
There have been changes in the area of public aid. On the eve of World War II the exigencies of the Depression had increased public aid spending to more than 40% of the social welfare total. After the war, that percentage dropped sharply and by 1960 had fallen to 8%. The programs that accompanied the 1960’s War on Poverty increased both the amount and the share of public money spent in this area.
The Food Stamp program began paying benefits in 1961. In 1964, Congress passed the Economic Opportunity Act, and the 1965 Amendments to the Social Security Act created the Medicaid program. By 1970, public aid accounted for 11% of all social welfare spending, and by 1993 it accounted for more than 16%.
The increase in public aid spending involved the State and local governments, due to the matching funds required by several of the Federal programs. Whereas State and local governments provided only 15-20% of the social insurance funds spent between 1965 and 1993, their share of the public aid bill ran between 30% and 40%. The largest State and local insurance expenditures are for em- ployee pensions, unemployment insurance, and the workers’ com- pensation program; assistance programs such as Aid to Families with Dependent Children and Medicaid account for the bulk of State and local public aid funds.
Despite the public aid increases, education has remained the largest social welfare expense for the States and localities. In 1929, 77% of all State and local social welfare funds were spent on education. Even with the growth of social insurance and the poverty programs over the years, in 1993 nearly 53% of State and local social welfare spending went for education.
Governments at all levels have spent somewhat more of their funds for social welfare purposes since the 1960’s. During the years from 1929 to 1965 the percentage of all government expenditures that went for social welfare was between 32% and 50%, with the exception of the war years, when the percentage fell as low as 9%. In 1965-70, the range was 42% to 47%; and since 1971 more than half of all government spending has been for social welfare.
Appendix I: Social welfare expenditures under public programs, selected